How to borrow cash for that $75,000 kitchen you’ve always coveted

When it comes to financing your renovation, you have several options, some better than others. Your best bet is to sit down with your financial advisor and discuss which suits your individual situation, and how much you can reasonably afford to borrow.

Cash Great if you have it, especially for small projects. But if you have a substantial sum in a high-interest investment account or mutual fund, withdrawing it for a reno may not always be your best option: You should measure the loss in compound interest that the money would have earned in the savings account against the cost of an equivalent loan. In some cases, the loan might actually be cheaper, especially if it's secured.

Personal loan, line of credit Often have flexible repayment terms and fixed or variable interest rates. Loans are fixed for a set number of years with regular payments; PLCs have more flexible terms, allowing you to borrow up to a prearranged limit, paying all or a portion of the balance each month above a minimum (which is usually fairly small).

Secured line of credit, home equity loan Similar to loans and PLCs, but with lower interest rates, since your home is used as security or collateral. This can be an economical source of low-cost funds, but it's really a type of second mortgage, with all the drawbacks that entails - including the possibility of foreclosure if you default.

Mortgage refinancing Refinancing your existing mortgage allows you to spread out the payments over a much longer period of time, usually at a lower rate even than a secured PLC, and gives you access to as much as 80% of your home's appraised value. Costs may include legal and appraisal fees, and sometimes penalties, which you should weigh against the cost of other borrowing options. Another option is to allow extra funds for renovations when you take out a new mortgage, such as when you purchase a new home.

Reverse mortgage Financial advisors generally advise against these mortgages, as they are really nothing more than highly restrictive regular mortgages that you don't make payments on, so interest on them compounds unhindered - to the advantage of the lender. If you wish to borrow against the equity in your home, you're much better off with a new mortgage, home equity loan or secured line of credit.

Source